Corporate Tax for Partnerships, Trusts and Foundations

February 16, 2024by Ajay Denny0

The UAE is introducing its Corporate Tax this year, and it’s crucial for partnership firms and family trusts to understand how it impacts them. Here’s a simplified breakdown.

What is a Partnership Firm

A partnership is a legal arrangement where two or more persons agree to manage, operate and share the profits of a business. Depending on the extent to which the respective partners are exposed to liabilities of the partnership firm, the organization could be a limited liability partnership or a general partnership wherein the partners are exposed to unlimited liability.

Incorporated Partnership vs Unincorporated Partnership

The Federal Decree-Law No. 47 of 2022 defines an Unincorporated Partnership as “A relationship established by contract between two Persons or more, such as a partnership or trust or any other similar association of Persons, in accordance with the applicable legislation of the State.”

Therefore, it becomes evident that an Unincorporated Partnership is a contract between two persons and thus does not create a separate legal existence. Therefore, the assets, liabilities, income, and expenditure of the UIP will be allocated based on the proportion of the share of each of the partners. An Incorporated Partnership on the other hand has a separate and independent legal existence. Incorporated Partnership includes Limited Liability Companies (LLCs), Partnership Limited with Shares (PLSs), General Partnerships, etc.

How are partnerships taxed in the UAE

Article 16 (1) of the Corporate Tax Law states that an Unincorporated Partnership shall not be considered as a separate taxable person, rather the income derived by the Unincorporated Partnership will be subject to Tax in the hands of partners in the proportion to their share in the Unincorporated Partnership. If the share of partners cannot be ascertained, the FTA will assign the ratio of profit distribution to be considered for taxation purposes.

However, as Incorporated partnerships have a separate legal existence in their own right, these entities are considered separate taxable persons.

UIP and tax transparency

As the income incurred by the UIPs is taxable in the hands of the partners constituting the firm, the Partnership is considered “fiscally Transparent” for taxation, and therefore the activities of the UIP are treated as carried on by the partners and not by the partnership for tax purposes.

Taxation for foreign partnership

Foreign partnerships that are not subject to tax under the foreign tax jurisdiction and where each of the partners in the foreign partnership is individually subject to tax with regards to their distributive share of any income from the foreign Partnership as and when the income is received by or accrued to the Foreign Partnership will be considered as an Unincorporated Partnership for the purpose of CT.

Any Foreign Tax incurred by the UIP will be allowed as Foreign Tax Credit to each partner in proportion to their distributive share in the UIP.

When do you have to pay corporate tax

As the income derived by Unincorporated Partnership is taxable in the hands of partners, one question quickly pops up. Does the individual partner have to compulsorily pay tax because he derives income from a UIP?

Not necessarily. An individual will be required to pay tax if their aggregate turnover exceeds AED 1 million and the net profit exceeds AED 350,000.

How to register partnership firms for corporate tax?

UIPs, because of their non-separate existence apart from its partners, are not required to register for Corporate Tax. However, Partners in a UIP can voluntarily register for Corporate Tax following which the UIP will be considered as a taxable person and each partner in the UIP shall remain jointly and severally liable for CT payable by the UIP for those tax periods where they are partners in the UIP.

Further in order to register for CT, a UIP will have to appoint a partner as its authorized representative responsible for any obligations and proceedings on behalf of the UIP.

Bookkeeping requirements

As per Article 54 (3) of the CT Law, the authority may request a partner in a UIP to provide financial statements that may include any of the following:

The total assets, liabilities, income, and expenditure of the UIP and the partner’s distributive share in the Unincorporated Partnership’s assets, liabilities, income, and expenditure.

Corporate Tax exemption for trusts and foundations in UAE

A Family foundation in its own right is a separate legal entity and hence considered as a separate taxable person. However, a family foundation may apply to the FTA to be treated as an Unincorporated Partnership.

UAE offers advantageous jurisdiction for trusts and family foundations that imposes no tax on the income derived by the organization on behalf of its beneficiaries. So how does the CT law impact the trusts/ foundations from a tax perspective?

Trusts and foundations will continue to benefit from the tax-free environment if the business they operate is not subject to a mandatory licensing requirement in the state. This means that unless the trust or the foundation is not engaging in real estate or other business that requires a valid license for operation, the organization can continue to enjoy the tax-free status. However, if the organization is operating in business activities that require a valid license for operation, the CT Law will become applicable to such entities.

What is defined as family foundation

As defined in the CT law, A family foundation includes any foundation, trust, or similar entity that meets the following conditions.

  • The family foundation was established for the benefit of identified natural persons, or for the benefit of a public benefit entity,
  • The principal activity of the foundation is to receive hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment.
  • The family foundation does not conduct any activity that would have constituted a Business or Business Activity under the provisions of the CT Law had the activity been undertaken, or its assets been held, directly by its founder, settlor, or any of its beneficiaries.
  • The principal purpose of the family foundation is not the avoidance of Corporate Tax.

In order to monitor the continued compliance by the foundation with the relevant conditions, the Federal Tax Authority (FTA) may request any relevant information or records from the foundation from time to time.

Disclaimer

The opinions expressed in this blog are those of the respective authors. ATB Legal does not endorse these opinions. While we make every effort to ensure the factual accuracy of the information provided in our blogs, inaccuracies may occur due to changes in the legislative landscape or human errors. It is important to note that ATB Legal does not assume any responsibility for actions taken based on the information presented in these blogs. We strongly recommend verifying information from official sources and consulting with professional advisors to ensure its accuracy and relevance to your specific circumstances.

About ATB Legal

ATB Legal is a full-service legal consultancy in the UAE providing services in dispute resolution (DIFC Courts, ADGM Courts, mainland litigation management and Arbitrations), corporate and commercial matters, IP, business set up and UAE taxation. We also have a personal law department providing advice on marriage, divorce and wills & estate planning for expats.

Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.

by Ajay Denny

Ajay is a young ACCA Affiliate who is eager to take on challenging opportunities, pushing the status quo, thus helping make a positive impact on the Accounting Profession and the global community at large.

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